Your first small business loan can make such a big difference for your company. You could use the money to buy equipment, expand your space, or develop new products. But how do you get one?
The first small business loan is often the hardest to procure. Once you have a history of making timely payments on a business loan, you’ll be more qualified in the future. But in order to get that first loan, you need to make sure you have stellar credit, get all your paperwork in order (and there may be a lot of it), create a business plan, choose the appropriate loan product, and then approach the lenders who can offer you that product.
Boost Your Credit
Your business and personal credit scores are very important when it comes to qualifying for your first small business loan. Check your personal credit score and make sure to dispute any errors you find. Clean up your credit by paying bills on time and paying off debts. Keep your credit utilization ratio, or the amount you owe on all of your revolving credit accounts, below 30 percent, and if it’s not below 30 percent currently, pay down your credit cards until it is.
A healthy business credit score can also help you gain the confidence of lenders. You can boost your business credit score, paying off bills early, and establishing trade relationships. You can list vendors and suppliers as references on your Dun & Bradstreet report even if they, the vendors, don’t report to credit bureaus themselves.
Make a Plan
Lenders don’t want to be sold on your ideas or your products. They want to be confident that your business is profitable and that you can therefore be relied upon to pay the business loan back. In order to instill this confidence, you’re going to need a business plan, as well as a loan proposal that will show lenders the goals of your business and the specific plans you have for the loan, should you get it. Lenders want to see real numbers – what are your expenses? How much profit are you making? What is your business goal? What exactly do you plan to do with the loan? How much revenue you’ll need will depend on the lender and the type of loan product you choose.
Get Your Paperwork in Order
You’re going to need to prepare a lot of paperwork to qualify for most small business loans. In addition to your loan proposal and business plan, prepare to produce:
- Business and personal bank statements
- Business and personal tax returns
- Business and personal credit scores
- Business financial documents like balance sheets and income statements
- A statement of purpose
- Permits, contracts, your business license, and other legal documentation
- Proof of collateral
- A copy of your resume
If your business doesn’t have a strong and lengthy financial history to demonstrate your ability to repay a loan, then you will need to make up for that with good personal qualifications and finances, a strong business plan with accurate but stable financial projections, and perhaps some kind of collateral.
Choose a Loan Product
There are so many types of small business loans available to entrepreneurs today. If you have strong credit and good financials, you may want to go with a traditional bank loan or Small Business Administration (SBA) loan. If you’re qualified for a traditional loan product but need funding fast, you can go for a medium-term business loan with a term of one to five years.
If you can’t qualify for a traditional business loan, you still have some options. You can apply for a short-term loan from an online lender. These loans are typically approved quickly and they’re available to business owners with poor credit. You can also apply for a business line of credit, which is convenient because you can borrow exactly as much as you need and as you repay it, your line of credit grows larger again.
Approach Lenders
Which lenders should you approach to file a loan application? To some extent, it can depend on what type of loan product you want. You can approach local banks about traditional small business loans and sometimes business credit cards and lines of credit. If you can’t get a bank loan, you might still be able to qualify for an SBA loan.
If you need fast funding, you can turn to an online lender. Online lenders tend to process applications faster and some can have money in your account within days, rather than the couple of months it can take to get a small business loan. Many online lenders are willing to take a chance on a business owner with poor credit or a short business history.
Getting your first small business loan can be intimidating, but you just need to know your funding options. Whether you get a traditional loan from a bank or a short-term loan from an online lender, your business will still be getting the funds it needs to grow.
